“Reason to Believe” – A Subjective Term (In the context of ‘Arrest’ under CGST ACT,2017)

[Anuj Bansal]

Word ‘Arrest’ can be considered synonym of horror, panic, distress and worry. Under GST Law, a number of arrests are being done these days. Provision of arrest should be exercised by GST officers with utmost caution. In fact, Writ petitions are also getting filed in Supreme Court and High Courts challenging Constitutional validity of Section 69 and 132 of CGST Act. Recently, in the case of Devendra Dwivedi Vs. Union of India & Ors. [2021 (1) TMI 302 - SUPREME COURT] Dt. 07.01.2021, the Supreme Court dismissed writ petition under Article 32 of the Constitution of India, challenging constitutional validity of certain provisions of CGST 2017, pertaining to powers of inspection, search, seizure, arrest and penalties & prosecution. It was held that, it would be appropriate to approach High Court for remedy by way of a petition under Article 226 of the Constitution of India, so that the Hon’ble Supreme Court has the benefit of the considered view of the jurisdictional High Court.

Writ petition has also been filed in Bombay High Court, in December 2020, challenging provisions of Arrest under CGST Act.  According to petitioner, “Section 69 of the Central GST Act is arbitrary since it gives powers to GST commissioners to arrest a person if he has ‘Reasons to Believe’ that the person has claimed fraudulent ITC. Commissioners can order up to five years of arrest of a person who he has reasons to believe is engaged in fraudulent claims. ‘Reasons to Believe’ are subjective in nature and are prone to misuse.”

Although, in a latest order dated 08.01.201021, Delhi High Court in case of Dhruv Krishan Maggu & K.P & Sons vs. Union of India & Ors., [2021 (1) TMI 330 - DELHI HIGH COURT] has upheld that  Sections 69 of arrest and 132  of the CGST Act are constitutional and fall within the legislative competence of Parliament.

As stated above arrest can be made u/s 69 of CGST Act, if Commissioner has ‘Reasons to Believe’ that a person has committed any specific offence as specified in certain clause of Section 132 of CGST Act. Usage of words, ‘Reason to Believe’ is not new in taxation laws. In the past also it has created lot of litigation and confusions. Under almost every tax statue this term is used, e.g. in Income tax Act, u/s 147 of Income Escaping Assessment; in Central Excise Act 1944, u/s 13 of Power to Arrest; in Customs Act 1962, u/s 110 of Seizure of goods, documents and things, term ‘Reason to believe’ is used.

Let’s start with understanding meaning of term ‘Reason to Believe’. According to Section 26 of IPC, “A person is said to have “Reason to believe” a thing, if he has sufficient cause to believe that thing but not otherwise.” In tax statues nowhere this term has been defined. On the basis of settled case laws, we can interpret its meaning hereunder. Though case laws pertain to different statues but principles shall be applicable for all the provisions where the legislatures have granted “reason to believe” power to the officers.

1. ‘Reason to Believe’ should not be construed as subjective term

1. INCOME-TAX OFFICER, I WARD, DISTT. VI, CALCUTTA, AND OTHERS VERSUS LAKHMANI MEWAL DAS [1976 (3) TMI 1 - SUPREME COURT]

In this landmark decision, Apex Court held that “……the expression ‘Reason to Believe’ does not mean a purely subjective satisfaction on part of the Income Tax officer. The reason must be held in good faith. It cannot be merely pretence”.

2. M/S. TATA CHEMICALS LTD. VERSUS COMMISSIONER OF CUSTOMS (PREVENTIVE) JAMNAGAR [2015 (5) TMI 557 - SUPREME COURT]

“….Suffice is to say that these expressions have been held not to mean the subjective satisfaction of the officer concerned. Such powers given to the concerned officer is not an arbitrary power and has to be exercised in accordance with the restraints imposed by law.” 

3. N NAGENDRA RAO & CO. VERSUS STATE OF AP [1994 (9) TMI 316 - SUPREME COURT]

Apex Court observed in this case, “The expression ‘reason to believe’ has been interpreted by this Court to mean that even though formation of opinion may be subjective but it must be based on material on the record. It cannot be arbitrary, capricious or whimsical.”

4. SHEO NATH SINGH VERSUS APPELLATE ASSISTANT COMMISSIONER OF INCOME-TAX (CENTRAL) , CALCUTTA, AND OTHERS [1971 (8) TMI 6 - SUPREME COURT]

“…….There can be no manner of doubt that the words “reason to believe” suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income tax officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumor.”

2. ‘Reason to Believe’ should be recorded

 It is established in many cases that tax officer must record ‘reason to believe’ though it is not necessary to communicate the same to assessee.

1. Director General of Income Tax (Investigation), Pune and Ors. V. Spacewood Furnishers Private Limited, 2015 (5) TMI 483 - SUPREME COURT          

“…………..Though Rule 112(2) of the Income Tax Rules which specifically prescribe the necessity of recording of reasons before issuing a warrant of authorization had been repealed on and from 1^st October, 1975 the reasons for the belief found should be recorded.

2. BIRLA VXL LIMITED VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX [1995 (9) TMI 45 - GUJARAT HIGH COURT]

“……….Another requirement which is necessary for assuming jurisdiction is that the AO shall record his reasons for issuing notice. This requirement necessarily postulates that before the AO is satisfied to act under the aforesaid provisions, he must put in writing as to why in his opinion or why he holds belief that income has escaped assessment. "Why" for holding such belief must reflect from the record of reasons made by the AO.”

C. Court can’t comment on sufficiency and adequacy of reasons recorded

1. PRAFUL CHUNILAL PATEL VERSUS MJ MAKWANA / ASSISTANT COMMISSIONER OF INCOME-TAX [1998 (2) TMI 538 - GUJARAT HIGH COURT]

“………..His reasoning may be the result of official information or his own investigation or may come from any source that he considers reliable. His reason is not to be judged by a Court by the standard of what the ideal man would think.”

2. GANGA PRASAD MAHESHWARI AND OTHERS VERSUS COMMISSIONER OF INCOME-TAX [1980 (10) TMI 7 - ALLAHABAD HIGH COURT]

“………..When it is said that reason to believe is not open to scrutiny what is meant is that the satisfaction arrived at by the officer concerned is immune from challenge but where the satisfaction is not based on any material or it cannot withstand the test of reason, which is an integral part of it, then it falls through and the court is empowered to strike it down. Belief may be subjective but reason is objective.”

Case Laws on ‘Reasons to believe’ specific to GST Law

1. VIMAL YASHWANTGIRI GOSWAMI VERSUS STATE OF GUJARAT [2020 (11) TMI 40 - GUJARAT HIGH COURT]

In this latest case dated 20.10.2020, reason to believe has been discussed in length in the context of GST in para 51 to 59.

Hon’ble Gujrat Hight Court observed that, “Reason to believe, consists of two words “reason” and “to believe”. The word “reason” means cause or justification and the word “believe” means to accept as true or to have faith in it. Therefore, there must be justification for it and belief is the result of the mental exercise based on information received. The words ‘reason to believe' contemplate an objective determination based on intelligence, care and deliberation involving judicial review as distinguished from a purely subjective consideration”.

2. M/S GOLDEN COTTON INDUSTRIES VERSUS UNION OF INDIA [2019 (7) TMI 471 - GUJARAT HIGH COURT]

Gujarat high Court made following observation in above mentioned case:-

The words “where the proper officer has reason to believe” in section 67 of the Act suggest that the belief must be that of an honest and reasonable person based upon the relevant materials and circumstances.

The statutory requirement of reasonable belief, rooted in the information in possession of Proper Officer under the Act, is to safeguard the citizen from vexatious proceedings. ‘Belief’ is a mental operation of accepting a fact as true, so, without any fact no belief can be formed.

3. RIMJHIM ISPAT LIMITED, JUHI ALLOYS LIMITED, L.D. GOYAL STEELS PVT. LTD. VERSUS STATE OF U.P. AND 3 OTHERS, AND 04 OTHERS, AND 2 OTHERS [2019 (3) TMI 916 - ALLAHABAD HIGH COURT]

Allahabad High Court made following observations:-

The principles that are culled out from the catena of decisions referred above is that the ‘reason to believe’ should exist and should be based on reasonable material and should not be fanciful or arbitrary.

It is also well established that this court in exercise of its powers under Article 226 cannot go into sufficiency of the reasons and should not sit as an Appellate court over the reasons recorded.

It is also well established that reasons may or may not be communicated to the assessee but the same should exist on record.

4. SANJAY KUMAR BHUWALKA, NEERAJ JAIN VERSUS UNION OF INDIA [2018 (7) TMI 589 - CALCUTTA HIGH COURT]

Calcutta High Court made following observations about reason to believe in case of arrest u/s 69:-

“……reason to believe has to be formed by the Commissioner after the records of such inspection and search are communicated to him under sub-section 10 of Section 67 of the Act or any other manner the materials are placed before him for the formation of his reason to believe”.

Concluding the above, it may be observed that ‘Reasons to Believe’, as held in various judicial pronouncements, is not an arbitrary power and it can’t be exercised on purely subjective satisfaction of the officer. Moreover, the ‘Reasons to Believe’ shall be recorded for issuing notice and for establishing opinion of the officer. The satisfaction should be based on material evidence/documents. Specifically under GST law, in the decision of  Vimal Yashwantgiri Goswami (Supra) the term ‘Reasons to Believe’ has been very well discussed in length and it has been observed by the Court that there must be reason and also a belief as a result of mental exercise based on information received. Therefore, the ‘Reasons to believe’ shall not be arbitrary but should be exercised in judicial manner to avoid litigation and hardship to taxpayers.